Ind-Ra Assigns Negative Outlook to Domestic Gold Prices

India Ratings & Research (Ind-Ra) has assigned a negative outlook to domestic gold prices for FY15 as they are likely to decline to the range of INR25,500/10g to INR27,500/10g.

The expected decline in domestic gold prices takes cues from the likelihood of a decline in international gold prices to between USD1,150/oz-USD1,250/oz during FY15, from the current levels of USD1,300/oz. Fitch Ratings Ltd expects a further recovery/strengthening in the US and eurozone GDP growth rates in FY15. This is likely to strengthen the US dollar against other currencies. The US Dollar Index, which has historically had a negative correlation with gold prices, is expected to remain strong.

The gradual winding-up of unconventional monetary policy (UMP) in the US might cause interest rates to creep up and discourage investments in gold. Continued risk-on-trade on back of a global economic recovery could generate limited interest in gold ETF investments and could lead to a further unwinding of gold inventory. However, the pace is likely to be moderate.

While the US has initiated the process of winding-up UMP, EU and Japan continue with their loose monetary policy. Given the unsynchronised monetary policy approach among these major nations and ensuing uncertainty over fiat currencies, central banks remained the net buyers of gold. However, we expect the net buying to moderately recede in FY15.

The expectation of a decline in domestic gold prices assumes a status quo on restrictions on gold importation and Indian rupee-US dollar rates. However, the forecast assumes a substantially lower level of physical premium (importers and traders mark-up) than that prevailed in 2013, given emerging clarity on gold import policy. In any case, any ease in gold import restrictions will have limited incremental impact on domestic gold prices.

What Could Change The Outlook

Hedge Against Uncertainty: Gold has characteristics which cause people to use it as a hedge against macroeconomic uncertainties or any perceived debasement of fiat money. Lower-than-expected GDP growth rates in the US and/or EU, geopolitical tensions and China's financial market uncertainty could cause gold prices to creep up above USD1,300/oz levels.

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